What Disadvantages Do Small Investors Face When Investing in the Stock Market?

by David Rodeck, Demand Media

Small investors pay higher brokerage fees than large investors.

When you are a small investor, the stock market can be a scary place. Small investors face a number of extra challenges that put them at a disadvantage against larger, wealthier investors. Fortunately, there are a number investment strategies that you can use as a small investor to get around these problems and break the bank on your investments.

Small Investor

A small investor is any investor that isn't an institutional investor or a high-net worth investor. An institutional investor is someone who trades stocks for a living at a bank or other financial institution. A high-net worth investor is considered by the U.S. Securities and Exchange Commission as someone that has at least $750,000 in invested assets. This makes a small investor someone with less than $750,000 invested in the stock market who trades for himself, not for a company. Small investors generally invest in individual stocks, mutual funds and index funds. While they have other investment choices available, such as options, these investments are usually too complicated and expensive for small investors.

Costs

A big disadvantage small investors face in the stock market is costs. In the same way Walmart can negotiate a lower buying price than a family store, large investors are able to negotiate lower investment fees than smaller investors. Brokerage firms typically charge a higher percentage for management fees on small accounts than on larger accounts. This means as a small investor you need a high return for the year to break even. To get around this problem, shop around for low-fee mutual funds. Funds that don't trade often, especially index funds, have very low annual fees. These investments keep more money in your account and out of your broker's pocket.

Diversification

A key risk-management strategy in investing is diversifying your portfolio across different companies and industries. This protects your investment, because different industries are less likely to lose money at the same time. For example, high oil prices hurt car manufacturers but help oil companies. As a small investor, it's harder to build your own diversified portfolio. You don't have enough money to spread across various industries. To solve this, get someone else to build the diversified portfolio. Mutual and index funds build large diversified portfolios by combining the investments of many small investors. These investments give you the benefit of diversification without the headache of managing the portfolio yourself.

Information

One other disadvantage you face as a small investor is your lack of information. Professional investors have research staffs that are constantly providing them with up-to-date information. As a small investor, it can feel like you're always one step behind your bigger competitors. However, the Internet has made a big dent in this disadvantage. By spending a few hours a week on financial websites, you'll see the exact same information as professional investors. While professionals still have an information advantage, they don't have nearly the same head start as they did before the Internet.

References

About the Author

David Rodeck has been writing professionally since 2011. He specializes in insurance, investment management and retirement planning for various websites. He graduated with a Bachelor of Science in economics from McGill University.